When Tata Steel Ltdannounced its production figures for the December quarter earlier, it had already sounded a warning about the effect of rising raw material prices on profitability. And, European steel makers had warned about a weak December quarter. That had basically set the stage for its lacklustre performance on profitability.
The firm sold 5.7 million tonnes of steel, about 2% lower against the last quarter, but higher prices in Indian operations contributed to the turnover rising by 2% sequentially.
Indian operations saw profit before interest and tax rise by 18% over the year-ago period. But on a consolidated basis, the same figure showed flat growth. This can be understood by looking at its region-wise Ebidta, or earnings before interest, depreciation, tax and amortization.
Tata Steel’s consolidated Ebidta slipped from $1 billion (Rs 4,550 crore today) in the September quarter to $755 million in the December one. Indian operations contributed an Ebidta margin of 38.3%, but Europe managed just 2.2%. Since Europe contributes to over 60% of sales, overall profitability was hit, down at 11.6% against 16.2% in the first half.
The main culprit, according to the management, is rising iron ore prices and the introduction of quarterly contracts.
Due to the shift to quarterly benchmarks, the spot iron ore price movement is reflected in the contract benchmarks for the next quarter, which is then accounted for in the books in the subsequent quarter. But steel prices do not follow this pattern, creating a mismatch. While the quarter was expected to be weak for Europe, higher prices of raw materials worsened it.
The situation now is somewhat better as Tata Steel Europe is confident of passing on cost hikes to its customers, which should mean a better performance in the future.
But uncertainty on the price front for ore and coal prices continues. Iron ore prices are up by about 12% since December-end. Coal exports from Australia have been affected by floods, but Tata Steel had enough stocks for its immediate needs. There is no clarity on whether new contracts from Australia will be at much higher prices, though spot prices have moved up sharply.
The environment has not changed much. India remains a sweet spot, both for demand and prices. The global outlook is better in the fourth quarter, which is corroborated by statements from firms such ArcelorMittal. But investors will keep a vigil on iron ore and coal prices, which still have the power to wreak havoc on margins.